296 ASIA-PACIFIC TAX BULLETIN
must be a direct offshoot of the head office, as indirect
allocations (e.g. costs allocated by parent or regional
offices) are not deductible expenses for Taiwanese tax pur-
poses.
Dividend tax
When a foreign enterprise has a branch in Taiwan, it would
not be subject to withholding tax on dividend income
received. The branch, as with a domestically incorporated
company, should not be taxable in respect of dividend
income. Furthermore, when the branch remits profits back
to its head office, a withholding tax is not applicable, and
this is an advantage in using a branch office to make
investments in Taiwan.
Foreign investment in Taiwanese companies includes:
– listed shares; and
– other equity.
Foreign investors are permitted to establish a branch office
for the purposes of making investments in listed shares,
THAILAND
Withholding Tax Planning Techniques*
Kitipong Urapeepatanapong and Chinawat Assavapokee
Baker & McKenzie, Thailand
1. INTRODUCTION
Multinational companies have been expanding their busi-
nesses throughout the world. Tax planning has been a cen-
tral concern among entrepreneurs for decades and it is,
therefore, not surprising that the tax cost of doing business
in various jurisdictions is one of the main reasons for this
global expansion. Withholding tax, in particular, is one of
the costs in many jurisdictions.
This article surveys the subject of withholding tax and
suggests techniques to minimize the withholding tax bur-
den on payments to a foreign company not conducting
business in Thailand.
2. GENERAL RULES ON WITHHOLDING TAX
When income under Secs. 40(2), (3), (4), (5) or (6) of the
Revenue Code is paid to a foreign company not conduct-
ing business in Thailand, Sec. 70 of the Code determines
that the payer in Thailand is required to withhold tax at the
rate assigned by law.
Income under Sec. 40(2) is from service fees and commis-
sion. Sec. 40(3) is royalty income. Sec. 40(4) covers vari-
ous types of income, including interest, dividends and cap-
ital gains from the sale of shares. Sec. 40(5) generally
covers rental income, while Sec. 40(6) is in respect of
income derived from professional services, i.e. law,
© 2003 International Bureau of Fiscal Documentation
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AUGUST/SEPTEMBER 2003
with the approval of the Securities Future Commission
and the Central Bank.
In order to make investments in other types of equity par-
ticipation, i.e. to acquire shares of unlisted companies or
establish a subsidiary or a joint venture company, prior
approval from the Investment Commission (IC) is
required. The IC has not and, we believe, will not approve
foreign investments through a branch office. Therefore,
the branch office structure would not be a viable mecha-
nism for making investment in equity other than listed
shares.
A branch office, as opposed to a subsidiary, can also be
utilized to avoid withholding tax on the transfer of profits
to the head office. The tax authorities have proposed a
20% withholding tax on profits transferred by a branch
office as a means to ensure the collection of dividend tax
on the investments made via a branch office. However,
this proposal has been mooted for more than a decade and
it is unlikely to be implemented in the near future.
medicine, engineering, architecture, accounting and fine
arts.
Income under Sec. 40 that is not covered by Sec. 70, is
income deemed to be income under Secs. 40(1), (7) and
(8). Sec. 40(1) is in respect of employment income, while
Sec. 40(7) is income from construction services. Finally,
Sec. 40(8) is in respect of income derived from business,
commerce, agriculture, industry, transportation or other
income not listed under Secs. 40(1) to 40(7).
Income covered by Sec. 70 will generally be subject to
15% withholding tax, except for dividends, which attract
only a 10% withholding tax. The 10% withholding tax on
dividends is not affected by double tax agreements (DTAs)
as it is within the reduced amount prescribed by the DTAs,
while the 15% withholding tax applicable to the other
income may be reduced or entirely nullified under the pro-
visions of a DTA. At present, Thailand has effective tax
treaties with 43 countries.
* © Baker & McKenzie, 2002.
AUGUST/SEPTEMBER 2003 ASIA-PACIFIC TAX BULLETIN
3. WITHHOLDING TAX ON SPECIFIC
TRANSACTIONS/INCOME
3.1. Interest
Generally, interest paid by a payer in Thailand to a foreign
company not conducting business in Thailand is subject to
a 15% withholding tax. However, the withholding tax rate
can be reduced to 10% if the payee is a financial institution
of a country that has concluded a DTA with Thailand.
Please note that the withholding tax on interest can be
reduced to 3% in respect of loans or credits granted for
four years or more with the participation of a financing
public institution to a statutory body or to a Thai company
in relation to the sale of any equipment or to the survey, the
installation or the supply of industrial, commercial or sci-
entific premises and of public works.
Apart from the reduction of the tax rate under an applica-
ble DTA, interest paid to such foreign company can be
exempt from Thai withholding tax by virtue of specific
exemptions under the Thai tax laws.
These exemptions include:
– interest paid by the Thai government or by a financial
institution organized by a specific law of Thailand for
the purpose of lending money to promote agriculture,
commerce or industry;1
– interest on a foreign currency loan paid by (i) the Bank
of Thailand, or (ii) a governmental enterprise if the
loan has been approved by the Ministry of Finance;2
– interest on bonds sold abroad and issued by the Thai
government, a governmental enterprise and a financial
institution organized by a specific law of Thailand for
the purpose of lending money to promote agriculture,
commerce or industry;3 and
– interest on loans paid by Bangkok International Bank-
ing Facilities (BIBF) for extending the loans in a for-
eign country.4
3.2. Dividends
Dividends are subject to 10% withholding tax, which rate
might be equal to or lower than the withholding tax rate
specified in some DTAs. In other words, the 10% with-
holding tax on dividends is not affected by the DTAs as the
withholding tax pursuant to the DTAs concluded by Thai-
land does no exceed 10%. However, the dividends can be
exempt if the dividends are paid out of the promoted prof-
its by a BOI company, that is, a company promoted or
granted a tax holiday by the Board of Investment.5
3.3. Royalties
Pursuant to Sec. 70 of the Thai Revenue Code, a 15%
withholding tax is imposed on royalty6 income of a foreign
company not conducting business in Thailand. The rate
may be reduced or exempted in certain cases by virtue of
the DTAs which Thailand has entered into.
Typical tax treaty planning involving royalty is that there
may be a need to explore those DTAs that reduce with-
holding tax and reroute the royalties to be received by a
© 2003 International Bureau of Fiscal Documentation
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297
country with a lower tax rate. For example, certain DTAs
would reduce withholding tax on software licence royal-
ties to 5%. Those DTAs include the ones with Belgium,
Bulgaria, Canada, Cyprus, the Czech Republic, France,
Germany, Italy, Mauritius, the Netherlands, Poland, Spain,
Switzerland, the United Kingdom and the United States.
In addition, certain DTAs would also reduce withholding
tax on software licence to 10%, namely Pakistan, Indone-
sia and New Zealand.
3.4. Service fees
Service fees paid to a foreign company not conducting
business in Thailand, if such fees are considered as Sec.
40(2) income, are subject to a 15% withholding tax, unless
otherwise exempt under a DTA. Under a DTA, service fees
paid to a foreign company which is a tax resident of a
treaty country are exempt from Thai withholding tax,
unless such foreign company has a permanent establish-
ment (PE) in Thailand and the service fees are attributable
to the PE.
In practice, some taxpayers try to argue that service fees
are income under Sec. 40(8) rather than Sec. 40(2) and are
therefore not subject to Thai withholding tax, since Sec.
40(8) is not covered by Sec. 70. To distinguish Sec. 40(2)
income from Sec. 40(8) income, the Supreme Court ruled
that in order for service fees to be deemed as income under
Sec. 40(8), such income must involve major expenses,
such as service fees received by a foreign company con-
ducting seismic surveys for petroleum companies. On the
other hand, service fees derived from a business that
incurs relatively little expense or from an uncomplicated
business would be categorized as income under Sec.
40(2). When the income is classified under Sec. 40(8), it
will not be subject to Thai withholding tax under Sec. 70,
and therefore DTAs need not be considered. With service
income under Sec. 40(2), however, it is necessary to con-
template DTA provisions, if the foreign company is a resi-
dent of a country which has a DTA with Thailand.
1. Sec. 70, Revenue Code, Second Paragraph.
2. Sec. 5 Septem, Royal Decree No. 10.
3. Sec. 5 Octo, Royal Decree No. 10.
4. Sec. 5 Undecim, Royal Decree No. 10.
5. Sec. 34, BOI Act.
6. Thailand’s tax laws are contained primarily in the Revenue Code, which
imposes taxes on income other than income subject to the Petroleum Income Tax
Act. Although the Thai Revenue Code contains no definition of “royalty
income”, it is likely that the Revenue Department will base its decision on the
definition of royalty contained in the DTAs. At present, Thailand has 43 DTAs
with its trading partners. Generally, the term “royalty” includes the following:
(1) payments for the use of or the right to use copyrights of literary, artistic or
scientific works, patents, trademark, design or models, plans, secret formu-
las or processes;
(2) payments for the use of or the right to use cinematography films, or films
or tapes used for radio or television broadcasting;
(3) payments for the use of or the right to use industrial, commercial or scien-
tific equipment;
(4) payments for information concerning industrial, commercial or scientific
experience; and
(5) payments for the alienation of (1) and (2).
298 ASIA-PACIFIC TAX BULLETIN
3.5. Cost-sharing allocation
In practice, many multinational companies allocate cost
shares among offices in various countries. An example
would be when a regional headquarters incurs certain
expenses (e.g. management expenses and corporate over-
head expenses) for the benefit of various offices or sub-
sidiaries in the region and would like to seek reimburse-
ment from such offices and/or subsidiaries in the region.
The most frequently asked question is whether such reim-
bursement is subject to withholding tax or not.
In such a case it is likely that the Thai Revenue Depart-
ment will treat the reimbursement of expenses paid to a
foreign company by a Thai company as either (i) royalties
or (ii) service fees, depending on the nature of the cost
allocated, which may or may not be subject to the payment
of Thai withholding tax.
4. LIMITATION OF THE PAYMENT
The Revenue Code does not explicitly specify any limita-
tion on the amount of the royalties, licence fees, service
fees or cost allocation. However, such payments might be
indirectly limited by the deductibility of the cost allocated
(Transfer Pricing Rule). In general, if a Thai company can
prove that the fees paid to a foreign company are for the
benefit of the Thai company and the amount of the fees is
not excessive, the fees can be deducted as expenses when
computing the Thai company’s corporate income tax.
5. TAX PLANNING TECHNIQUES
5.1. Treaty shopping
Generally, treaty shopping is the most effective means of
avoiding the withholding tax burden. This entails a multi-
national company entering into a back-to-back agreement
with an entity that is a tax resident of a country that has a
DTA with Thailand, and the conduit entity then enters into
an agreement with a company in Thailand. In other words,
the multinational company would use the conduit entity as
the payee of income paid in or from Thailand.
Treaty shopping is widely used in Thailand as the Thai
Revenue Code does not specifically prohibit treaty shop-
ping. A particular tax treaty may, however, contain a pro-
vision barring treaty shopping, as in the case of Art. 18 of
the United States–Thailand DTA which limits the persons
who can claim benefits under the DTA.
5.2. Conversion of withholding taxable income into
non-withholding taxable income
Apart from treaty shopping, withholding tax can be min-
imized or avoided via certain methods that convert income
subject to withholding tax into income exempt from with-
holding tax. The following are examples of how to min-
imize withholding tax on debt financing transactions.
© 2003 International Bureau of Fiscal Documentation
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AUGUST/SEPTEMBER 2003
Use of supplier credit
Before 7 November 1991, interest payable on an instal-
ment sale agreement or hire purchase agreement was
treated as income under Sec. 40 (8) of the Revenue Code
thus falling outside the scope of withholding tax under
Sec. 70. Since Sec. 40(4)(a) was amended on 7 November
1991, the Revenue Department has consistently ruled that
such interest paid by a Thai customer to an offshore sup-
plier is treated as income similar to interest on a loan under
the amended Secs. 40(4)(a) and 70 of the Revenue Code
and are therefore subject to a withholding tax of 15% or
10% as the case may be.
In any event, it may still be possible to use an instalment
sale agreement or hire purchase agreement without incur-
ring a withholding tax obligation if the interest rate is a
fixed rate, which can be added to the sales price as one
lump-sum amount and nothing in the agreement mentions
such interest element.
Use of cross-border lease
Under this alternative, a foreign company (lessor) would
purchase the equipment or goods, and lease such equip-
ment or goods to a Thai company instead of lending the
money to the Thai company to purchase the equipment or
goods. It must be noted that, in order to avoid the with-
holding tax, the offshore lessor in this case must be a resi-
dent of a country which has concluded a DTA with Thai-
land that exempts withholding tax on rental income. This
is because the rental payment paid by the Thai borrower to
the offshore lessor is generally subject to a withholding tax
of 15%.
The withholding tax of 15% may not be applicable under a
particular DTA, provided that (i) the lessor does not have a
PE in Thailand, and, (ii) there is no reference to the “inter-
est” as part of the rent.
Commercial paper, i.e. B/E and P/N
A Thai borrower would issue the B/E and P/N (“the
notes”) for sale in general. A foreign lender may purchase
the notes from the Thai borrower directly or from the sec-
ondary market in Thailand. Before the redemption date,
the foreign lender would sell the Thai notes to a Thai
financial institution, which would hold the notes until
maturity.
Generally, profit received by a foreign company not doing
business in Thailand from sale of the Thai notes before the
redemption date is treated as capital gain (income under
Sec. 40(4)(g) of the Revenue Code) and subject under Sec.
70 to withholding tax at the rate of 15%. However, such
profit may fall within an exemption rule under a particular
DTA with Thailand if the foreign lender is entitled to the
benefit of the DTA. The financial institution in Thailand
must hold the notes for its own account and both the hold-
ing period and the purchase price should be sufficient to
prove the reality of the transaction.
Use of offshore branch of Thai bank
A foreign lender will deposit the funds with an offshore
branch of a Thai bank, which in turn will lend the funds to
AUGUST/SEPTEMBER 2003 ASIA-PACIFIC TAX BULLETIN 299

a Thai borrower. Upon payment of interest, the Thai bor-
rower is not required to withhold tax, as the offshore
branch of the Thai bank is a Thai company according to
the revenue rulings. The major concern here would be that
the Thai bank may be required by the Bank of Thailand to
make a reserve and the cost of doing so could be high.
Use of equity financing instead of debt financing
A foreign lender will not lend the funds to the Thai bor-
rower (being a company with tax holiday privileges) but
will instead purchase newly issued preferred shares from
the Thai borrower at par in lieu of the principal amount of
the loan. The objective is to convert the “taxable interest”
into a so-called “tax-free dividend” under the investment
promotion privileges. The benefit of a tax-free dividend
will exist only during the tax holiday period (a maximum
of eight years after the first date of having the promoted
income).
6. CONCLUSION
From the above, it is apparent that it is possible to min-
imize or avoid withholding tax through appropriate tax
planning. It is, therefore, important for every multinational
company to pay close attention to tax planning techniques
as these could result in a significant reduction in the cost of
their business operations.

[continued from page 282] Mongolia

Dari Munhzul and Prof. Yukinobu Kitamura:
Indonesia The State of Public Finance 209
Wimbanu Widyatmoko:
VAT On Cross-Border Intra-Group Services 272 Pakistan
Dr Ikramul Haq:
International Ownership and Claim of Depreciation 131
Dr Clay Goodloe Wescott:
Measuring Governance in the Asia-Pacific Region and Philippines
its Relevance for Tax Administrators 51 Rowena Rodriguez Salido:
Taxing Electronic Commerce Transactions: Lessons
Prof. Dr Hubert Hamaekers: from Japan 150
Taxation Trends in Europe 42
Dennis G. Dimagiba:
Kanokpan Lao-Araya: – Tax Controversies 259
How Can Cambodia, Laos, Myanmar and Vietnam Cope – VAT On Cross-Border Intra-Group Services 280
with Revenue Lost Due to AFTA Tariff Reductions? 58
South Korea
Collin Lau and Andrew Halkyard: Dong Soo Kim:
From E-Commerce to E-Business Taxation 2 Withholding Tax Planning Techniques 291

Israel Stefan L. Moller and Tae-Yeon Nam:

Leon Harris: Advance Pricing Approvals 221
Tax Reform Process 22
Sai Ree Yun:
Japan Tax Controversies 259
Masatsugu Asakawa:
International Taxation Policy 74 Taiwan
Keye S. Wu:
Dr Hiromitsu Ishi: – VAT On Cross-Border Intra-Group Services 281
Thinking the Unthinkable: A Tax Rise for a Sustainable – Withholding Tax Planning Techniques 293
Future in Japan 26
Robin Wang:
Edwin T. Whatley: Tax Controversies 264
– Tax Controversies 245
– VAT On Cross-Border Intra-Group Services 274 Thailand
Edwin van der Bruggen:
Kazakhstan Overview of the Taxation of Expatriates 159
Samant Sarbassov:
Taxation of Non-Residents 128 Kitipong Urapeepatanapong and Chinawat Assavapokee:
Withholding Tax Planning Techniques 296
Lebanon
K.W. Ng:
An Overview of the Tax Regime 177 DEVELOPMENTS

Malaysia Australia
Dr Mohammad Talha: Ramon Jeffery:
Treatment of Goodwill 134 Reform of Venture Capital 37

Anand Raj: John Rienstra:

The End of Ampat Tin Is in Sight 188 US Senate Ratifies Protocol 191
© 2003 International Bureau of Fiscal Documentation

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300 ASIA-PACIFIC TAX BULLETIN AUGUST/SEPTEMBER 2003

Antonia Rowland: Malaysia

– Budget 2003/04 224 Mei June Soo:
– Draft GST Ruling on General Law Partnerships 191 Package of Measures to Stimulate Economic Growth 230

Australia/New Zealand Middle East

Dr Kevin J. Holmes: Salah Gueydi:
Legislation to Resolve Taxation of “Trans-Tasman” Final Regulations for Customs Union Adopted 140
Investments 138
New Zealand
China Dr Kevin J. Holmes:
Shiqi Ma: – Government Announces Tax Policy Works
– Taxation of Financial Asset Management Programme 39
Undertaken by Foreign Investment Enterprises 226 – Tax Acts Enacted 192
– Taxation of Representative Offices 225
OECD
Yanli Xu: Wolfgang Oepen:
Taxation of Open Securities Investment Funds 38 New Discussion Drafts on Attribution of Profits to a
Permanent Establishment Re Banking (Revised)
Fiji and Global Trading 193
Antonia Rowland:
2003 Budget 163 Gyongyi Vegh:
Fifth Edition of the OECD Model Tax Convention
Hong Kong on Income and on Capital Published 192
Shiqi Ma:
2003 Budget 163 Papua New Guinea
Antonia Rowland:
Wolfgang Oepen: 2003 Budget 140
Shipping Agreement Between Germany and Hong Kong
Signed 227 PATA
John Rienstra:
India Agreement on Standard Transfer Pricing Documentation
Har Govind: Package 194
– Advance Rulings and Other Judicial Decisions –
Update 1/2003 113 Saudi Arabia
– Advance Rulings and Other Judicial Decisions – Salah Gueydi:
Update 2/2003 164 Bill to Reduce Tax on Foreign Enterprises Adopted by
– Advance Rulings and Other Judicial Decisions – Consultative Council 231
Update 3/2003 227
Singapore
Israel Mei June Soo:
K.W. Ng: 2003 Budget 141
Exit Tax Introduced 166
Uzbekistan
Japan Aurobindo Ponniah:
Taichi Haraguchi: 2003 Budget 143
Tax Reform Package for Financial Assets and Stocks 229

© 2003 International Bureau of Fiscal Documentation

Exported / Printed on 17 Oct. 2022 by WU (Wirtschaftsuniversität Wien).